This Has Been a Test: Developing a Financial Plan You Can Stick With

If the past few years have taught investors anything, it is that uncertainty is not an exception to investing. It is part of the deal.

Think back to the end of 2019. Markets were strong, unemployment was low, interest rates were historically low and inflation was relatively subdued. Few people could have imagined what was coming next.

A global pandemic. One of the sharpest market sell-offs in decades. A remarkable vaccine-led recovery. The spectacular rise and fall of meme stocks and cryptocurrencies. Surging inflation. War in Ukraine. A dramatic shift in interest rates. And, more recently, continued geopolitical tensions and uncertainty about the global economy.

The details change. The lesson does not.

You cannot build a successful financial plan around predicting what happens next. You can build one around being prepared for uncertainty.

The ultimate test of an investment plan

Imagine someone had told you at the end of 2019 exactly what was about to happen. They could have described the pandemic, the market crash, the extraordinary rebound, the inflation shock and the geopolitical turmoil.

Would you have stayed invested?

Most of us would probably like to think we would. In reality, knowing what was coming might have made it harder to remain calm.

This is the paradox of investing. Markets respond to information as it arrives, often violently and unpredictably in the short term. Yet over longer periods, investors are compensated for taking risk.

That means a good investment plan is not one that successfully predicts every market move. It is one that gives you a reasonable chance of reaching your financial goals without requiring you to make perfect decisions along the way.

The real test is not whether your portfolio falls during a difficult period. The real test is whether your plan gives you enough confidence to stay the course when it does.

What does a plan you can stick with look like?

A financial plan should start with your life, not the markets.

Your goals, time horizon, income, spending needs, family circumstances and attitude towards risk all matter. The right investment strategy for one person could be completely inappropriate for another.

This is why there is no universally “best” portfolio.

A younger investor with decades before retirement may be able to tolerate significant short-term volatility. Someone approaching retirement may need a different balance between growth, stability and liquidity. A business owner, expat or someone with complex family arrangements may have additional considerations that need to be incorporated into the plan.

The important question is not simply, “What return can I get?”

It is:

“What investment strategy gives me the best chance of achieving my goals while allowing me to sleep at night?”

That distinction matters.

A portfolio that looks excellent on paper but causes you to panic and sell during a downturn is not necessarily a good portfolio for you.

Volatility is not necessarily failure

When markets fall, it is natural to look for an explanation.

Was the economic data worse than expected? Is inflation going to remain high? Will interest rates fall? What will central banks do? Is another geopolitical shock coming?

There is no shortage of commentary willing to provide an answer.

But knowing why markets moved yesterday does not necessarily tell you what they will do tomorrow.

Trying to respond to every headline can quickly turn investing into a series of emotional decisions. Sell when things look frightening. Buy when optimism returns. Chase what has recently performed well. Abandon an asset class after a disappointing period.

The problem is that these decisions often feel sensible at the time.

A robust financial plan provides an alternative. Rather than asking what the market might do next, you can return to the decisions you made when you were thinking clearly: how much risk you need to take, how much you can afford to take and what you are investing for.

The power of staying invested

One of the most important benefits of a long-term investment strategy is that it allows you to participate in the growth and innovation taking place across economies and businesses.

Companies continue to develop new technologies, improve productivity, create products and solve problems. Economies evolve. Businesses adapt. Human ingenuity continues, even when markets are struggling.

That does not mean markets rise in a straight line. They do not.

It means that temporary uncertainty does not necessarily change the long-term reason for investing.

The challenge is giving your strategy enough time to work.

Build the plan before the next test

There will be another market shock.

We do not know what will cause it. We do not know when it will happen. We do not know how severe it will be.

And that is precisely why your financial plan should not depend on knowing.

Instead, build a strategy based on sound investment principles, aligned with your circumstances and realistic enough that you can stick with it when markets become uncomfortable.

Then revisit it when your life changes, not simply because the headlines do.

Because successful investing is rarely about having the ability to predict the future.

It is about having the discipline to prepare for an uncertain one.

Interested in investing?

Get in touch.

Source: This Has Been a Test: Developing a Financial Plan You Can Stick With by David Booth, Dimensional.